IT Investment To Weigh on 7&I’s Profits Despite Upbeat Same-Store Growth Guidance; Inflation a Risk

Narrow-moat 7&I’s operating profit miss, 3% short of its guidance and nearly 5% short of our estimate for fiscal 2021 ending February 2022, was broad-based across all business segments except the overseas convenience store, or c-store, business. The shortfall was attributable to the omicron surge and commodity inflation in addition to yen weakness. The operating profit guidance for fiscal 2022, indicating nearly 11% growth year on year, is uninspiring as sizable IT investment is likely to weigh on profits through 2023. Yet, our thesis that the transformation of U.S. c-stores to destination retailers through food-service expansion will lead the group’s mid- to long-term growth, remains intact. We have maintained our fair value estimate of JPY 5,600 after adjusting our profit estimates, lowering the projections for 2022 and 2023 but raising forecasts for 2024 and beyond, to reflect the impact of IT investment. While we cut our profit estimates for 2022 by more than 10%, they remain a touch above guidance. The shares are trading in line with our intrinsic value and we prefer to wait for more attractive entry points to own the name.